Contracts PDF

Accountancy Review Center (ARC)
of the Philippines Inc.

One Dream, One Team
Contracts
(Art. 1305-1422)
CHAPTER 1
GENERAL PROVISIONS
Atty. Johnson A.H. Ong, CPA, MBA

EFFECTIVITY
TOPIC May 2016 Oct 2017 May 2019
Obligation 15 10 10
Contract 15 10 10
Sales 10 7 7
Credit Transaction 6 3 4
Negotiable Instruments 9 4 4
Bouncing Check 3 2
Partnership 15 10 10
Corporation, SRC and Corporate Governance 30 20 28
Financial Rehabilitation and Insolvency Act (FRIA 2010) 10 -
Cooperatives 10 10
AMLA Law 2 5
PDIC Law 3 2
Secrecy of Bank Deposit and unclaimed Balances Law 2 2
General Banking Law 2 -
The New Central Bank Act 2 -
Intellectual Property Law 2 2
Data Privacy Act 2
E-Commerce Law 1
Ease of Doing Business Law 1
Total 100 100 100
Definition: Contract
Definition:
A contract is a meeting of minds between two
persons whereby one binds himself, with respect
to the other, to give something or to render some
service. (Art. 1305)
Limitation:
The contracting parties may establish such
stipulations, clauses, terms and conditions as
they may deem convenient, provided they are
not contrary to law, morals, good customs, public
order, or public policy. (Art. 1306)
Atty. J_Ong_Oct 2020
RCPI vs. CA., G.R. No. L-44748. August 29, 1986
A Petition for Review by certiorari of the decision of the Court of Appeals, modifying the
decision of the trial court in a civil case for recovery of damages against petitioner
corporation by reducing the award to private respondent Loreto Dionela of moral
damages from P40,000 to P15,000, and attorney's fees from P3,000 to P2,000.
The basis of the complaint against the defendant corporation is a telegram sent through
its Manila Office to the offended party, Loreto Dionela, reading as follows:
"176 AS JR 1215 PM 9 PAID
MANDALUYONG JUL 22-66
LORETO DIONELA
CABANGAN LEGASPI CITY.
WIRE ARRIVAL OF CHECK
FER.
LORETO DIONELA — CABANGAN — WIRE ARRIVAL OF CHECK-PER.
115 PM.
• SA IYO WALANG PAKINABANG DUMATING — KA DIYAN — WALA KANG PADALA
DITO — KAHIT BULBULMO" (p. 19, Annex "A")
• Defendant defense: Defendant-corporation as a defense, alleges that the additional

words in Tagalog was a private joke between the sending and receiving operators and
that they were not addressed to or intended for plaintiff and therefore did not form
part of the telegram and that the Tagalog words are not defamatory.
RCPI vs. CA., G.R. No. L-44748. August 29, 1986
Ruling:
• Petitioner is a domestic corporation engaged in the
business of receiving and transmitting messages. Every
time a person transmits a message through the
facilities of the petitioner, a contract is entered into.
Upon receipt of the rate or fee fixed, the petitioner
undertakes to transmit the message accurately.
• There is no question that in the case at bar, libelous
matters were included in the message transmitted,
without the consent or knowledge of the sender. There
is a clear case of breach of contract by the petitioner in
adding extraneous and libelous matters in the message
sent to the private respondent.

Example: Contrary to moral
1. A promise of marriage based on a carnal
consideration is immoral (Batarra vs. Marcos,
7 Phil 156)
2. Interest stipulation of 5.5% per month or
66% per annum. (Medel et al vs. Court of
Appeal, et al, G.R. No. 131622. November
27, 1998)

Example: Contrary to public policy
1. Stipulation exempting a carrier from liability for
gross negligence (Heacock vs. Macondray, 32
Phil 205)
2. Encourage fraud (Bough vs. Cantiveros, 40 Phil
209)
3. Denying access to court (Manila electric Co., vs.
Pasay Transportation, 57 Phil 603)
4. Stipulation to refund all the benefits received by
student under scholarship if he transfer to
another school. (Emeterio Cui vs. Arellano
University, 2SCRA 205)
Kinds of contract
• Formation or perfection
– Consensual – perfected by mere consent (1315)
– Real – perfected by delivery (i.e. depositum, pledge,
commodatum) (1316)
– Formal or solemn Contract – Perfected upon
execution of certain formalities.
• Interest must be in writing (1956);
• Contribution of immovable property must be in a public
instrument (Art. 1771 and 1773)
• Donation of personal property where the value exceed
P5,000 must be in writing (Art. 748)
• Donation of immovable property must be in a public
instrument (Art. 749)
• Sale of land or interest therein, the authority of the agent
must be in writing (Art. 1874)

Kinds of contract
• Cause or equivalence of value of prestation
– Onerous – equivalent value of prestation
– Gratuitous or lucrative – no equivalent prestation
– Remunerative - the prestation is the benefit or
service that had been rendered previously.
• Importance or dependence of one upon another
– Principal – can stand alone
– Accessory – depend upon the existence of another
contract
– Preparatory – not considered the contract as an end
by itself but as a mean for entering in future
transaction or contract.

Kinds of contract
• Parties obligated
– Unilateral – only one party has obligation
– Bilateral – both party has obligation
• Name or designation
– Nominate – has a name given by law
– Innominate – no name given by law
Innominate contracts shall be regulated by the stipulations
of the parties, by the provisions of Titles I and II of this
Book, by the rules governing the most analogous nominate
contracts, and by the customs of the place. (Art. 1307)
a. Do ut des (I give that you may give) no longer innominate. Barter
b. Do ut facias (I give that you may do)
c. Facio ut des (I do that you may give)
d. Facio ut facias (I do that you may do)

Kinds of contract
• Risk of fulfillment
– Commutative – real fulfillment, equivalent value are given
– Aleatory – the fulfillment depend upon chance.
• Time of performance or fulfillment
– Executed – prestation are already complied with
– Executory – prestations are to be complied with in the
future
• According to number of person who participated in the
drafting of the contract
– Ordinary -
– Contract of adhesion – Where the terms and condition of
the contract is already drafted by one party. The other
party only signifies his consent by signing the contract.
Stages of contract
1. Preparation (Negotiation, conception or
Generacion) – steps taken by the parties
leading to the perfection of the contract.
2. Perfection (or birth) – Come to a definite
agreement or meeting of the mind upon the
object and the cause.
3. Consummation (death or termination) –
parties have performed their respective
obligation

Characteristics of contract
1. Freedom of contract - contracting parties
may establish such stipulations, clauses,
terms and conditions as they may deem
convenient (1306)
– Limitation:
• Law
• Moral
• Good custom
• Public order
• Public policy

2. Mutuality of contract - contract must bind both
contracting parties; its validity or compliance
cannot be left to the will of one of them (1308).
The principle is based on the essential equality
of the parties.
– The determination of the performance may be left to
a third person, whose decision shall not be binding
until it has been made known to both contracting
parties. (1309)
– The determination shall not be obligatory if it is
evidently inequitable. In such case, the courts shall
decide what is equitable under the circumstances
(1310)
Mutuality of contract – Contract of sales
Art. 1473. The fixing of the price can never be left to the
discretion of one of the contracting parties. However, if the
price fixed by one of the parties is accepted by the other, the
sale is perfected
Determinate
Seller Object Buyer

Mutuality of contract – Partnership
Illustration
Art. 1798. If the partners have agreed to intrust to a third person the designation of
the share of each one in the profits and losses, such designation may be impugned
only when it is manifestly inequitable. In no case may a partner who has begun to
execute the decision of the third person, or who has not impugned the same within a
period of three months from the time he had knowledge thereof, complain of such
decision.
The designation of losses and profits cannot be intrusted to one of the partners.
(1690)
ABC Partnership
A B C
Partner Partner Partner

3. Relativity of contract - Contracts take effect only between the parties,
their assigns and heirs (1311)
Exception:
a. Where the obligations arising from contract are not transmissible by
nature (personal qualification is involved), by stipulation or by provision
of law (Agency, partnership, commodatum).
b. Stipulation in favor of third person (stipulation pour autrui)
• If a contract should contain some stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person. (Art. 1311 par 2)
c. In contracts creating real rights, third persons who come into possession
of the object of the contract are bound thereby, subject to the provisions
of the Mortgage Law and the Land Registration Laws. (1312)
d. Creditors are protected in cases of contracts intended to defraud them.
(1313)
e. Any third person who induces another to violate his contract shall be
liable for damages to the other contracting party. (1314)

Manila Railroad Co. vs. Compania
Trasatlantica, 38 Phil 875
Contract to unload the

Contract of carriage cargo from the ship
A B C
Cargo was damaged

Mandarin Villa, Inc. vs. CA, G.R. No. 119850. June 20, 1996
Facts:
In the evening of October 19, 1989, private respondent.
Clodualdo de Jesus, a practicing lawyer and businessman,
hosted a dinner for his friends at the petitioner's
restaurant, the Mandarin Villa Seafoods Village.
Greenhills, Mandaluyong City. After dinner the waiter
handed to him the bill in the amount of P2,658.50.
Private respondent offered to pay the bill through his
credit card issued by Philippine Commercial Credit Card
Inc. (BANKARD). This card was accepted by the waiter
who immediately proceeded to the restaurant's cashier
for card verification. Ten minutes later, however, the
waiter returned and audibly informed private respondent
that his credit card had expired.
• Private respondent remonstrated that said credit card
had yet to expire on September 1990, as embossed on
its face. The waiter was unmoved, thus, private
respondent and two of his guests approached the
restaurant's cashier who again passed the credit card
over the verification computer. The same information
was produced, i.e., CARD EXPIRED.
• Private respondent and his guests returned to their
table and at this juncture, Professor Lirag, another
guest, uttered the following remarks: "Clody [referring
to Clodualdo de Jesus], may problema ba? Baka
kailangang maghugas na kami ng pinggan?“
Thereupon, private respondent left the restaurant and
got his BPI Express Credit Card from his car and offered
it to pay their bill. This was accepted and honored by
the cashier after verification. Petitioner and his
companions left afterwards.
• The Point of Sale (POS) Guidelines which outlined
the steps that petitioner must follow under the
circumstances provides.
• "xxx xxx xxx
• "CARD EXPIRED
• a. Check expiry date on card.
• b. If unexpired, refer to CB.
• b 1. If valid, honor up to maximum of SPL only.
• b.2. If in CB as Lost, do procedures 2a to 2e.,
• b.3. If in CB as Suspended/Cancelled, do not
honor card
• c. If expired, do not honor card." 12
Mandarin Villa, Inc. vs. CA, G.R. No.
119850. June 20, 1996
Ruling:
A cursory reading of said rule reveals that whenever the
words CARD EXPIRED flashes on the screen of the verification
machine, petitioner should check the credit card's expiry date
embossed on the card itself. If unexpired, petitioner should
honor the card provided it is not invalid, cancelled or
otherwise suspended. But if expired, petitioner should not
honor the card. In this case, private respondent's BANKARD
credit card has an embossed expiry date of September
1990. 13 Clearly, it has not yet expired on October 19, 1989,
when the same was wrongfully dishonored by the petitioner.
Hence, petitioner did not use the reasonable care and
caution which an ordinary prudent person would have used
in the same situation and as such petitioner is guilty of
negligence.
4. Consensuality of contracts
– Contracts are perfected by mere consent, and
from that moment the parties are bound not only
to the fulfillment of what has been expressly
stipulated but also to all the consequences which,
according to their nature, may be in keeping with
good faith, usage and law. (Art. 1315)
– Exception:
• Formal Contract
• Real Contract

Unauthrorized contracts
Art. 1317. No one may contract in the name of another
without being authorized by the latter, or unless he has
by law a right to represent him.
A contract entered into in the name of another by one
who has no authority or legal representation, or who has
acted beyond his powers, shall be unenforceable, unless
it is ratified, expressly or impliedly, by the person on
whose behalf it has been executed, before it is revoked by
the other contracting party.
Principal Agent 3rd person

1. No authority
2. Acted beyond his power
CHAPTER 2
ESSENTIAL REQUISITES OF
CONTRACTS
General Provisions
SECTION 1. - Consent
ESSENTIAL REQUISITES OF CONTRACTS
Art. 1318. There is no contract unless the
following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of
the contract;
(3) Cause of the obligation which is established.

Elements of a Contract
• Essential elements
– Common (Consent, Object, Cause)
– Special (Form /subject matter/consideration)
• Form – formalities in solemn contract, deliver in real contract, registration to bind third
person (Real estate mortgage, chattel mortgage)
• Solemn contract (Consent, Object, Cause + Execution of formalities)
– Stipulation of interest = writing. (Art. 1956)
– Contribution of immovable property in partnership = inventory of such
property + public instrument. (Art. 1771 & 1773)
– Donation of personal property where the value exceed P5,000 = in writing
(Art. 748)
– Donation as well as acceptance of real property = Public instrument. (Art.
749)
– Will = writing + formalities prescribed by law. (Art 804)
– Agent authority in case of sale of immovable property in behalf of the
principal = writing (Art. 1874)
• Real Contract (Consent, Object, Cause + Delivery)
– Deposit
– Pledge
– Commodatum
Special elements
Subject Matter
Real estate mortgage Real property No delivery

Chattel mortgage Personal property No delivery
Pledge Personal property Delivery
Antichresis Real property Delivery
Consideration or cause – Sale (price); Commodatum

(liberality)

Elements of Contract
• Natural elements – presumed to exist in
certain contracts
– Warranty against eviction
– Warranty against hidden defect
• Accidental elements (by stipulation) – Exist
only when they are expressly provide by the
parties. (i.e. Conditions, period, interest,
penalty, place of payment)

Consent
Art. 1319. Consent is manifested by the meeting of
the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer
must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.
Face to face
P500,000
A Object B
P500,000

Consent
Acceptance made by letter or telegram does not bind the offerer
except from the time it came to his knowledge. The contract, in such a
case, is presumed to have been entered into in the place where the
offer was made. (Art 1319 par 2)
Letter or telegram
6/15/2020 6/18/2020
A Object B
P500,000
6/19/2020
6/21/2020
Theory of manifestation
Theory of cognition

Consent
Art. 1320. An acceptance may be express or implied.
Art. 1321. The person making the offer may fix the time, place, and
manner of acceptance, all of which must be complied with.
Art. 1323. An offer becomes ineffective upon the death, civil
interdiction, insanity, or insolvency of either party before acceptance is
conveyed.
• Death
• Insanity
• Civil Interdiction
• Insolvency
6/15/2020 6/18/2020
A Object B
P500,000
6/19/2020
6/21/2020
Theory of cognition/manifestation
• Theory of cognition – The acceptance is
considered to effectively bind the offeror
only from the time it came to his
knowledge. (Civil code)
• Theory of manifestation – The contract is
perfected at the moment when the
acceptance is declared or made by the
offeree. (Code of commerce)
Consent
Art. 1324. When the offerer has allowed the offeree a
certain period to accept, the offer may be withdrawn at
any time before acceptance by communicating such
withdrawal, except when the option is founded upon a
consideration, as something paid or promised.
Option Money P10.000

Object
A B
P500,000
30 days

Letter of acceptance is withdrawn
A offered on Jan1. B accepted on Jan 8. The letter of acceptance was
received by A on Jan 15. But on Jan 12, B had already written a letter
revoking the acceptance. Was there a meeting of the minds?
Letter of offer
Jan 1
Object
A B
Letter of acceptance P500,000 Jan 8
Received Jan 15 Made a letter
Scenario 2 Scenario 1 of acceptance
Letter of revocation Letter of revocation
Jan 16 Jan 14
No meeting of the mind
If the letter of revocation of acceptance is received before Jan 15?

Answer: No meeting of the mind
If the letter of revocation of acceptance is received after Jan 15?
Answer: Yes (Reyes and Puno)
No (Tolentino and Manresa)
Not Definite Offer
Art. 1325. Unless it appears otherwise, business
advertisements of things for sale are not definite offers,
but mere invitations to make an offer. (n)
Art. 1326. Advertisements for bidders are simply
invitations to make proposals, and the advertiser is not
bound to accept the highest or lowest bidder, unless the
contrary appears.

Incapacity
Art. 1327. The following cannot give consent to
a contract:
(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes
who do not know how to write.

Vices of Consent
A contract where consent is given through (Art.
1330)
1. Mistake
2. Violence
3. Intimidation
4. Undue influence, or
5. Fraud

Mistake
In order that mistake may invalidate consent, it
should refer to the substance of the thing which
is the object of the contract, or to those
conditions which have principally moved one
or both parties to enter into the contract.
• Mistake as to the identity or qualifications of
one of the parties will vitiate consent only
when such identity or qualifications have
been the principal cause of the contract.
• A simple mistake of account shall give rise to
its correction.(1331)
Mistake
When one of the parties is unable to read, or if the
contract is in a language not understood by him,
and mistake or fraud is alleged, the person
enforcing the contract must show that the terms
thereof have been fully explained to the former.
(1332)
There is no mistake if the party alleging it knew the
doubt, contingency or risk affecting the object of
the contract. (1333)
Mutual error as to the legal effect of an agreement
when the real purpose of the parties is frustrated,
may vitiate consent. (1334)
Violence
Definition:
There is violence when in order to wrest consent, serious or irresistible force
is employed. (Art. 1335)
Art. 1336. Violence or intimidation shall annul the obligation, although it may
have been employed by a third person who did not take part in the contract.
Undue influence exercised by a third party vitiates consent, just like in the
case of violence and intimidation. (Memorandum to the Joint Congressional
Commiteee on Codification, March 8, 1951)
A B
• Violence
C
• Intimidation
Third person • Undue influence
Fraud? Atty. J_Ong_Oct 2020
Intimidation
Definition:
There is intimidation when one of the
contracting parties is compelled by a reasonable
and well-grounded fear of an imminent and
grave evil upon his person or property, or upon
the person or property of his spouse,
descendants or ascendants, to give his consent.

Intimidation
• To determine the degree of intimidation, the
age, sex and condition of the person shall be
borne in mind.
• A threat to enforce one's claim through
competent authority, if the claim is just or
legal, does not vitiate consent.

Undue Influence
Definition:
There is undue influence when a person takes
improper advantage of his power over the will
of another, depriving the latter of a reasonable
freedom of choice.

Factor to considered in undue
influence
1. Confidential
2. Family
3. Spiritual and
4. other relations between the parties, or
5. The fact that the person alleged to have been
unduly influenced was suffering from
1. mental weakness, or
2. was ignorant or
3. in financial distress. (Art. 1337)

Kinds of Fraud
1. Dolo Causante – Annulment
When, through insidious words or
machinations of one of the contracting
parties, the other is induced to enter into a
contract which, without them, he would not
have agreed to. (Art. 1338)
2. Dolo incidente – Damages
Incidental fraud only obliges the person
employing it to pay damages. (Art. 1344)

Fraud
• Failure to disclose facts, when there is a duty
to reveal them, as when the parties are bound
by confidential relations, constitutes fraud.
(1339)
• The usual exaggerations in trade, when the
other party had an opportunity to know the
facts, are not in themselves fraudulent. (1340)
• A mere expression of an opinion does not
signify fraud, unless made by an expert and
the other party has relied on the former's
special knowledge. (1341)
Fraud
• Misrepresentation by a third person does not
vitiate consent, unless such misrepresentation
has created substantial mistake and the same
is mutual. (1342)
• Misrepresentation made in good faith is not
fraudulent but may constitute error. (1343)
• In order that fraud may make a contract
voidable, it should be serious and should not
have been employed by both contracting
parties. (1344)
Is the doctrine of pari delicto apply
in a disbarment proceeding?
Carmelita Zaguirre vs. Atty. Alfredo
Castillo, A.C. No. 4921. March 6, 2003
• In a disbarment proceeding, it is immaterial that the
complainant is in pari delicto because this is not a
proceeding to grant relief to the complainant, but one
to purge the law profession of unworthy members, to
protect the public and the courts.”
• Respondent repeatedly engaged in sexual congress
with a woman not his wife and now refuses to
recognize and support a child whom he previously
recognized and promised to support. Clearly therefore,
respondent violated the standards of morality required
of the legal profession and should be disciplined
accordingly.
Employed by Employed by 3rd person
one of the
contracting
party
Violence Voidable Voidable
Intimidation Voidable Voidable
Fraud without Voidable Valid, unless it result to
connivance/ knowledge substantial mistake and
by the party benefited the same is mutual. It can
by the fraud be annulled on the
ground of mistake
Fraud with connivance/ Voidable Voidable. As if exercised

knowledge by the party by the party benefited by
benefited by the fraud the fraud.
Undue influence Voidable Voidable

Absolute simulated or fictitious Relative simulated
contract
The parties do not intend to be The parties conceal their true
bound at all. (1345) agreement. (1345)
VOID When it does not prejudice a
(1346) third person and is not intended
for any purpose contrary to law,
morals, good customs, public
order or public policy binds the
parties to their real agreement.
(1346)

SECTION 2. - Object of Contracts
OBJECT OF CONTRACTS
• All things which are not outside the commerce of men,
including future things, may be the object of a contract. All
rights which are not intransmissible may also be the object
of contracts.
• No contract may be entered into upon future inheritance
except in cases expressly authorized by law.
• All services which are not contrary to law, morals, good
customs, public order or public policy may likewise be the
object of a contract. (1347)
• Impossible things or services cannot be the object of
contracts. (1348)
• The object of every contract must be determinate as to its
kind. The fact that the quantity is not determinate shall not
be an obstacle to the existence of the contract, provided it
is possible to determine the same, without the need of a
new contract between the parties. (1349)
SECTION 3. - Cause of Contracts
CONSIDERATION
• To be a valid cause, it must be lawful, true and
real, definite or determinate as to its kind and
possible.
• In onerous contracts the cause is understood to
be, for each contracting party, the prestation or
promise of a thing or service by the other; in
remuneratory ones, the service or benefit which
is remunerated; and in contracts of pure
beneficence, the mere liberality of the
benefactor. (1350)
• The particular motives of the parties in entering
into a contract are different from the cause
thereof. (1351)
CONSIDERATION
• Contracts without cause, or with unlawful cause,
produce no effect whatever. The cause is unlawful if it
is contrary to law, morals, good customs, public order
or public policy. (1352)
• The statement of a false cause in contracts shall render
them void, if it should not be proved that they were
founded upon another cause which is true and lawful.
(1353)
• Although the cause is not stated in the contract, it is
presumed that it exists and is lawful, unless the debtor
proves the contrary. (1354)
• Except in cases specified by law, lesion or inadequacy
of cause shall not invalidate a contract, unless there
has been fraud, mistake or undue influence. (1355)

CHAPTER 3
FORM OF CONTRACTS
FORM OF CONTRACTS
Contracts shall be obligatory, in whatever form they may
have been entered into, provided all the essential
requisites for their validity are present. However, when
the law requires that a contract be in some form in order
that it may be valid or enforceable, or that a contract be
proved in a certain way, that requirement is absolute and
indispensable. In such cases, the right of the parties
stated in the following article cannot be exercised. (1356)
If the law requires a document or other special form, as in
the acts and contracts enumerated in the following
article, the contracting parties may compel each other to
observe that form, once the contract has been perfected.
This right may be exercised simultaneously with the
action upon the contract. (1357)
Form of Contract
Failure to Contract Observe
comply the
form
Convenient Valid + Consensual Yes
Enforceable
Enforceability Valid + Statute of No
Unenforceable Fraud
Validity Void Formal or No
solemn
contract
Illustration: Oral sale real property
A B
P2 M

Illustration: Oral sale of personal property
A B
P800,000

Illustration: Partnership
ABC Partnership
A B C
P800,000

Illustration: Partnership
ABC Partnership
A B C
P800,000

Illustration: Lease contract
A B
P50,000/month

The following must appear in a public document: (1358)
1. Acts and contracts which have for their object the creation,
transmission, modification or extinguishment of real rights
over immovable property; sales of real property or of an
interest therein a governed by articles 1403, No. 2, and
1405;
2. The cession, repudiation or renunciation of hereditary rights
or of those of the conjugal partnership of gains;
3. The power to administer property, or any other power
which has for its object an act appearing or which should
appear in a public document, or should prejudice a third
person;
4. The cession of actions or rights proceeding from an act
appearing in a public document.
5. All other contracts where the amount involved exceeds
five hundred pesos must appear in writing, even a private
one. But sales of goods, chattels or things in action are
governed by articles, 1403, No. 2 and 1405. (1280a)
CHAPTER 4
REFORMATION OF INSTRUMENTS
REFORMATION OF INSTRUMENTS
Art. 1359. When, there having been a meeting of
the minds of the parties to a contract, their true
intention is not expressed in the instrument
purporting to embody the agreement, by reason of
mistake, fraud, inequitable conduct or accident, one
of the parties may ask for the reformation of the
instrument to the end that such true intention may
be expressed.
If mistake, fraud, inequitable conduct, or accident
has prevented a meeting of the minds of the
parties, the proper remedy is not reformation of
the instrument but annulment of the contract.
Instances when there is be no Reformation
1. Simple donations inter vivos wherein no

condition is imposed;
2. Wills;
3. When the real agreement is void. (Art. 1366)

When reformation proper
• Mutual mistake of the parties causes the failure of the
instrument to disclose their real agreement (1361)
• One party was mistaken and the other acted
fraudulently or inequitably in such a way that the
instrument does not show their true intention. (1362)
• When one party was mistaken and the other knew or
believed that the instrument did not state their real
agreement, but concealed that fact from the former.
(1363)
• When through the ignorance, lack of skill, negligence
or bad faith on the part of the person drafting the
instrument or of the clerk or typist, the instrument
does not express the true intention of the parties.
(1364)

Who can ask for reformation?
A B
√ Mistaken √ Mistaken
√ Mistaken X Knowledge and concealed
√ Mistaken X Fraud
√ Fault of 3rd person √

CHAPTER 5
INTERPRETATION OF CONTRACTS
• If the terms of a contract are clear and leave no
doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall
control. (1370)
• If the words appear to be contrary to the evident
intention of the parties, the latter shall prevail
over the former.
• In order to judge the intention of the contracting
parties, their contemporaneous and subsequent
acts shall be principally considered. (1371)

• The interpretation of obscure words or
stipulations in a contract shall not favor the
party who caused the obscurity. (1377)
• When it is absolutely impossible to settle doubts
by the rules established in the preceding articles,
and the doubts refer to incidental circumstances
of a gratuitous contract, the least transmission of
rights and interests shall prevail. If the contract is
onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests.

Defective Contracts
Art. 1380 - Art 1422

New Civil Code
Defective contracts
Rescissible Voidable Unenforceable Void
The following contracts are The following The following The following contracts are
rescissible: contracts are contracts are inexistent and void from the
(1) Those which are entered into voidable or unenforceable, unless beginning:
by guardians whenever the wards annullable, even they are ratified: (1) Those whose cause, object or
whom they represent suffer lesion though there may (1) Those entered into purpose is contrary to law, morals,
by more than one-fourth of the have been no in the name of good customs, public order or
value of the things which are the damage to the another person by public policy;
object thereof; contracting parties: one who has been (2) Those which are absolutely
(2) Those agreed upon in (1) Those where given no authority simulated or fictitious;
representation of absentees, if the one of the or legal (3) Those whose cause or object
latter suffer the lesion stated in parties is representation, or did not exist at the time of the
the preceding number; incapable of who has acted transaction;
(3) Those undertaken in fraud of giving consent beyond his (4) Those whose object is outside
creditors when the latter cannot in to a contract; powers; the commerce of men;
any other manner collect the (2) Those where (2) Those covered by (5) `Those which contemplate an
claims due them; the consent is statute of fraud impossible service;
(4) Those which refer to things vitiated by (3) Those where both (6) Those where the intention of
under litigation if they have been mistake, parties are the parties relative to the
entered into by the defendant violence, incapable of giving principal object of the contract
without the knowledge and intimidation, consent to a cannot be ascertained;
approval of the litigants or of undue contract. (1403) (7) Those expressly prohibited or
competent judicial authority; influence or declared void by law. (Art. 1409)
(5) All other contracts specially fraud. (1390)
declared by law to be subject to
rescission. (1381)
Rescissible par 1
(1) Those which are entered into by guardians
whenever the wards whom they represent suffer lesion
by more than one-fourth of the value of the things
which are the object thereof;
Lesion by more than one-fourth
Guardian 3rd Person
Ward
Rescissible par 2
(2) Those agreed upon in representation of absentees, if
the latter suffer the lesion stated in the preceding
number;
Lesion by more than one-fourth
Administrator 3rd Person
Absentee
Rescissible par 3
(3) Those undertaken in fraud of creditors when the
latter cannot in any other manner collect the claims due
them;
Debtor Creditor
Donation
3rd person
Rescissible par 4
(4) Those which refer to things under litigation if they
have been entered into by the defendant without the
knowledge and approval of the litigants or of competent
judicial authority;
1. w/o knowledge & approval of the litigants
or
2. competent judicial authority;
Plaintiff Defendant 3rd person

Things
Under Litigation
Rescissible contract
• Rescissible contract – Rescissible contract is
valid until rescinded. It is allowed by reason of
injury or damage to one parties or to a third
person.
Rescissible contracts
1. Those which are entered into by guardians
whenever the wards whom they represent suffer
lesion by more than one-fourth of the value of
the things which are the object thereof;
– Not applicable when approved by court (1386)
– Prescriptive period: Four years from the termination
of incapacity
2. Those agreed upon in representation of
absentees, if the latter suffer the lesion stated in
the preceding number;
– Not applicable when approved by court (1386)
– Prescriptive period: Four years from the date the
domicile of the absentee is known.
3. Those undertaken in fraud of creditors when the latter cannot in
any other manner collect the claims due them;
– The action to claim rescission must be commenced within four years
(1389)
• Alienation which are presumed to have been entered into in fraud
of creditors
– Gratuitous title - donor did not reserve sufficient property to pay all
debts contracted before the donation.
– Onerous title - when made by persons against whom some judgment
has been issued. The decision or attachment need not refer to the
property alienated, and need not have been obtained by the party
seeking the rescission.
• Note: The design to defraud creditors may be proved in any other
manner recognized by the law of evidence. (1387)
• Whoever acquires in bad faith the things alienated in fraud of
creditors, shall indemnify the latter for damages suffered by them
on account of the alienation, whenever, due to any cause, it should
be impossible for him to return them.
• If there are two or more alienations, the first acquirer shall be liable
first, and so on successively. (1388)
Requisites of accion pauliana
For an accion pauliana to accrue, the following requisites
must concur:
1. That the plaintiff asking for rescission, has a credit
prior to the alienation, although demandable later;
2. That the debtor has made a subsequent contract
conveying a patrimonial benefit to a third person;
3. That the creditor has no other legal remedy to satisfy
his claim, but would benefit by rescission of the
conveyance to the third person;
4. That the act being impugned is fraudulent;
5. That the third person who received the property
conveyed, if by onerous title, has been an accomplice
in the fraud. (Anchor Savings Bank vs. Henry Furigay,
et al, G.R. No. 191178, March 13, 2013)
4.Those which refer to things under litigation if
they have been entered into by the defendant
without the knowledge and approval of the
litigants or of competent judicial authority;
– The action to claim rescission must be
commenced within four years (1389)
5.All other contracts specially declared by law to
be subject to rescission.
– The action to claim rescission must be
commenced within four years (1389)
Limitation on the exercise of rescission
• Contracts can be rescinded only in cases provided by law
• Being a subsidiary action, it can be exercised only when
there is no other legal means to obtain reparation for the
same. (1383)
• Can be exercised only to the extent necessary to cover the
damages caused. (1384)
• Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits,
and the price with its interest (mutual restitution). Hence, it
can be demanded only if the one claiming rescission can
return whatever he may be obliged to restore.
• It cannot be availed when the things which are the object
of the contract are legally in the possession of third persons
who did not act in bad faith. In this case, indemnity for
damages may be demanded from the person causing the
loss (1385)
• The action for rescission has not been prescribed.
Voidable Contract
• The consent is defective by reason of incapacity
of one party or vices of consent. It is valid until
annulled.
• The following contracts are voidable or
annullable, even though there may have been no
damage to the contracting parties: (1390)
1. Those where one of the parties is incapable of
giving consent to a contract;
2. Those where the consent is vitiated by mistake,
violence, intimidation, undue influence or fraud.
• These contracts are binding, unless they are
annulled by a proper action in court. They are
susceptible of ratification.
Grounds Prescriptive period
Intimidation, violence 4 years from the time
or undue influence the defect of the
consent ceases
Mistake or fraud 4 years from the time of

the discovery of the
same
Minors or other 4 years from the time
incapacitated persons the guardianship ceases
Voidable Contract
• Ratification extinguishes the action to annul a voidable
contract. (1392)
• Express ratification – Done in writing or orally
• Tacit ratification - with knowledge of the reason which
renders the contract voidable and such reason having
ceased, the person who has a right to invoke it should
execute an act which necessarily implies an intention to
waive his right. (1393)
• Ratification may be effected by the guardian of the
incapacitated person. (1394)
• Ratification does not require the conformity of the
contracting party who has no right to bring the action for
annulment. (1395)
• Ratification cleanses the contract from all its defects from
the moment it was constituted. (1396).
Voidable Contract
• The action for the annulment of contracts may be
instituted by all who are thereby obliged principally or
subsidiarily. However, persons who are capable cannot
allege the incapacity of those with whom they
contracted; nor can those who exerted intimidation,
violence, or undue influence, or employed fraud, or
caused mistake base their action upon these flaws of
the contract. (1397)
• An obligation having been annulled, the contracting
parties shall restore to each other the things which
have been the subject matter of the contract, with
their fruits, and the price with its interest, except in
cases provided by law. In obligations to render service,
the value thereof shall be the basis for damages.
(1398)
Voidable Contract
• When the defect of the contract consists in
the incapacity of one of the parties, the
incapacitated person is not obliged to make
any restitution except insofar as he has been
benefited by the thing or price received by
him. (1399)
• Whenever the person obliged by the decree of
annulment to return the thing can not do so
because it has been lost through his fault, he
shall return the fruits received and the value
of the thing at the time of the loss, with
interest from the same date. (1400)
Voidable Contract
• The action for annulment of contracts shall be
extinguished when the thing which is the
object thereof is lost through the fraud or
fault of the person who has a right to institute
the proceedings.
• If the right of action is based upon the
incapacity of any one of the contracting
parties, the loss of the thing shall not be an
obstacle to the success of the action, unless
said loss took place through the fraud or fault
of the plaintiff (1401)
Voidable Contract
• As long as one of the contracting parties does
not restore what in virtue of the decree of
annulment he is bound to return, the other
cannot be compelled to comply with what is
incumbent upon him.(1402)
Unenforceable Contract
• Valid but it cannot be enforced
• Subject to ratification
• Unenforceable contracts cannot be assailed by
third persons. (Art. 1408)
Unenforceable contract
The following contracts are unenforceable, unless
they are ratified: (1403)
1. Those entered into in the name of another
person by one who has been given no authority
or legal representation, or who has acted
beyond his powers;
Unauthorized contracts are governed by article

1317 and the principles of agency in Title X of this
Book. (Art. 1404)
Statute of Fraud
2. Those that do not comply with the Statute of
Frauds.
a. An agreement that by its terms is not to be
performed within a year from the making
thereof;
b. A special promise to answer for the debt,
default, or miscarriage of another;
c. An agreement made in consideration of
marriage, other than a mutual promise to marry;
Statute of Fraud
d. An agreement for the sale of goods, chattels or
things in action (personal property), at a price not
less than five hundred pesos, unless the buyer accept
and receive part of such goods and chattels, or the
evidences, or some of them, of such things in action
or pay at the time some part of the purchase money;
but when a sale is made by auction and entry is made
by the auctioneer in his sales book, at the time of the
sale, of the amount and kind of property sold, terms
of sale, price, names of the purchasers and person on
whose account the sale is made, it is a sufficient
memorandum;
e. An agreement of the leasing for a longer period than
one year, or for the sale of (real property) or of an
interest therein;
f. A representation as to the credit of a third person.
Statute of Fraud
Ratification:
Statutes of fraud is no longer applicable when:
a. Failure to object to the presentation of oral
evidence to prove the contract.
b. Acceptance of benefit under them (i.e. There
is total or partial performance) (Art. 1405)
Unenforceable Contracts
3. Those where both parties are incapable of giving consent to a
contract.
Art. 1407. In a contract where both parties are incapable of giving

consent, express or implied ratification by the parent, or guardian, as
the case may be, of one of the contracting parties shall give the
contract the same effect as if only one of them were incapacitated.
If ratification is made by the parents or guardians, as the case may be,
of both contracting parties, the contract shall be validated from the
inception.
Object
A B
Minor Minor
Void contract
The following contracts are inexistent and void from the
beginning: (1409)
1. Those whose cause, object or purpose is contrary to law,
morals, good customs, public order or public policy;
2. Those which are absolutely simulated or fictitious;
3. Those whose cause or object did not exist at the time of
the transaction;
4. Those whose object is outside the commerce of men;
5. Those which contemplate an impossible service;
6. Those where the intention of the parties relative to the
principal object of the contract cannot be ascertained;
7. Those expressly prohibited or declared void by law.
• These contracts cannot be ratified. Neither can the right to
set up the defense of illegality be waived.
Void Contract
1. Illegality of the cause or object of the contract constitutes a criminal
offens
– Both parties being in pari delicto, they shall have no action against each
other, and both shall be prosecuted. Moreover, the provisions of the
Penal Code relative to the disposal of effects or instruments of a crime
shall be applicable to the things or the price of the contract. (Art. 1411)
– This rule shall be applicable when only one of the parties is guilty; but
the innocent one may claim what he has given, and shall not be bound
to comply with his promise. (1305)
2. Unlawful or forbidden cause consists does not constitute a criminal
offense
– The fault is on the part of both contracting parties
• Neither may recover what he has given by virtue of the contract, or demand the
performance of the other's undertaking;
– Only one of the contracting parties is at fault
• At fault
– He cannot recover what he has given by reason of the contract, or ask for the fulfillment of
what has been promised him.
• Not at fault
– He may demand the return of what he has given without any obligation to comply his
promise. (Art. 1412)
Void Contracts
• The action or defense for the declaration of the inexistence
of a contract does not prescribe. (1410)
• Interest paid in excess of the interest allowed by the usury
laws may be recovered by the debtor, with interest thereon
from the date of the payment. (1413)
• Where one of the parties to an illegal contract is incapable
of giving consent, the courts may, if the interest of justice
so demands allows recovery of money or property
delivered by the incapacitated person. (1415)
• Art. 1421. The defense of illegality of contract is not
available to third persons whose interests are not directly
affected.
• Art. 1420. In case of a divisible contract, if the illegal terms
can be separated from the legal ones, the latter may be
enforced.
End of Contract
You got a dream. You gotta protect it. People
can't do somethin' themselves, they wanna
tell you you can't do it. If you want
somethin', go get it. Period.
Chris Gardner: THE PURSUIT OF HAPPYNESS

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Accountancy Review Center (ARC)

of the Philippines Inc.

Atty. Johnson A.H. Ong, CPA, MBA

• Defendant defense: Defendant-corporation as a defense, alleges that the additional

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Contract to unload the

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Principal Agent 3rd person

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Real estate mortgage Real property No delivery

Pledge Personal property Delivery

Antichresis Real property Delivery

Consideration or cause – Sale (price); Commodatum

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Option Money P10.000

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If the letter of revocation of acceptance is received before Jan 15?

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Fraud with connivance/ Voidable Voidable. As if exercised

Undue influence Voidable Voidable

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1. Simple donations inter vivos wherein no

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√ Mistaken X Knowledge and concealed

√ Fault of 3rd person √

Atty. J_Ong_Oct 2020

Atty. J_Ong_Oct 2020

Art. 1380 - Art 1422

Guardian 3rd Person

Lesion by more than one-fourth

Administrator 3rd Person